Business Studies
Topic: International investment AnalysisCountry and Industry sector Analysis :
Analyse the macro environment of any foreign country (Indonesia) of your choice and discuss potential risks and
opportunities offered to businesses. Students are required to identify a sector which has great potential to
enter.
Required:
Select any UK listed Multinational Enterprise (MNE) and critical discussion
of the key issues your chosen UK based MNE must consider in order to establish a successful operation in a
foreign country. The MNE must be registered on the London Stock Exchange.
Students are required to develop in-depth international investment analysis based on chosen sector and country
using different FDI policies.
Students will have to identify opportunities and risks facing the firm operating in an international environment,
and find relevant tools and solutions for minimising such risks.
The sources of finance available to the firm in the international capital market will also need to be analysed.
Students need to develop in-depth international investment analysis which focuses on the challenge of
international financial management.
Structure
Contents Page
Introduction
Main body, which should also be organised under appropriate headings as per marking criteria.
Conclusion
-Demonstrate an awareness and understanding of the theories, tools and instruments for making corporate financial decisions in an international context
– Make informed investment decisions based on the outcome of external and international environment analyses
– Appreciate the importance and potential uses of international financial markets, and be able to apply this knowledge in business situations.
– Identify and understand the potential risks and uncertainties facing firms that operate in the international environment and be able to suggest solutions and the financial tools that can be used to minimize these problems.
INTERNATIONAL INVESTMENT ANALYSIS
By
Course
Tutor
Institution
City
Date
Contents
Abstract 3
Introduction 4
Indonesia Macro-Environment Analysis to Determine Possible opportunities and risks 4
Political Factors 4
Economic Factors 6
Social Factors 7
Technological factors 8
Legal Factors 8
Environmental Factors 9
Sources of Finance Available to Coca-Cola Company in an International Capital 9
Potential Risks and Uncertainties Facing Companies Operating in an International 11
Foreign Exchange Risks 11
Political Risks 12
Language Barrier 12
Tools and Solutions to Minimize Risks and Uncertainties 13
Political Risk Insurance 13
Conclusion 13
References 14
Abstract
International investment has increased drastically in the current world. The drastic increase can be attributed to improved technology and enhanced networking due to globalization. International investment is important as it gives investors wider opportunities to venture in different parts of the world. The receiving country also benefits from the international investment due to taxes the investors give and the employment opportunities thy offer to country citizens improving the living standard. International investment is a source of economic growth to both the parent country and the receiving country. Despite of different advantages international investment bears, it has some risks and challenges it posses to the investor. This article analyzes the macro environment of Indonesia that can offer opportunity to international business. It analyzed the political, environmental, social, economic, technological and legal factors. The paper further analyzes some of the financial sources available to international business. Financial sources such as public deposits, trade credit and others are briefly discussed in the paper. The paper then analyzed some of the risks and uncertainty that international business by experience. Finally, it recommends ways to minimize the risks and uncertainties.
Keywords: International Investment, Financial sources, Trade Credit, Public deposit
Introduction
Globalization has dramatically enhanced international investment in the current world. Movement from one continent or nation to another has been eased due to improved transport networks globally. Globalizations have also ensured the enhancement of the internet and technology, easing communication between people. Enhance technology and communication allows an individual to conduct businesses from different parts of the world. International investments offer investors a larger venture space for choosing a range of investments. It also broadens the diversification of an investor, increasing the return sources. Most importantly, international investment enlarges the suitable tools for the portfolio of investment beyond just domestic venture. An investor can decide to venture internationally with the same investment they have domestically. Different nations offer different opportunities and risks for the business. Therefore, investors must carry out an intense macro environment analysis to determine the possible risks and opportunities in a particular nation before starting their ventures.
Indonesia Macro-Environment Analysis to Determine Possible opportunities and risks Offered to Coca-Cola Investors.
Indonesia is the fourth most populated country globally. Due to its large population, Indonesia has the potential to become a significant investment market. Many international investors are eyeing Indonesia because of its rate of economic growth. After a few years, Indonesia will be one of the largest economies in the world after China and India. This part will discuss some of the factors that may impact businesses in Indonesia.
Political Factors
Indonesia is a democratic country governed by the president and the Constitution. The president is the commander-in-chief, head of government, and head of state. The Constitution restricts the president’s service to a maximum of two consecutive terms. Currently, there are several parties that are in the frontline of the country’s politics, such as the Great Indonesia Movement Party, Prosperous Justice Party, Indonesian Democratic Party of Struggle, and Democratic Party. The use of the Constitution to govern the nation and the availability of multi-party in the country portrays how democracy plays a more significant role in Indonesia. Democratic nations are always associated with peace and political stability because the government listens to the public voice. In most cases, the government, mainly the president, will always aim at impacting the lives of the citizens.
Besides, Indonesia upholds a good foreign relation with the surrounding nations and avoids being caught in conflict with other countries. It is a member of the United Nations, the World Trade Organization, and the Organization of Islamic Cooperation. Similarly, Indonesia is one of the founders of the East Asia Summit and the Association of Southeast Asia Nations. Its good relation with other nations provides a good business opportunity to investors. The business will run smoothly throughout the year without any fear of attack from a neighboring government.
Furthermore, Indonesia has some of the best law enforcement systems in the world. The law enforcers ensure the security of the citizens in the country. A research carried out in the nation indicated that about 69 percent of Indonesian citizens have confidence in their police system, and over 68 percent feel free and safe when walking home at night (Asian Correspondents, 2019, 15). Indonesia is one of the highest orders and law ratings globally. The business in the land can operate freely both at day and night hours because of domestic security. The fear of losing property due to theft is highly reduced in the country.
However, corruption and bribery in business and government institutions remains a challenge in Indonesia and is the primary constraint to businesses. Bribery in public institutions is considered an offense by Indonesian law. The government is committed to tackling all kinds of corruption. They have established unions such as the Corruption Eradication Commission that monitors the possibility of political corruption and the interaction between organizations, their employees, and officials of the government concerning pubic service delivery like provision of business documentation and issuing of permits (Buckley & Casson, 2010, 41). The government has modernized the procedures for licensing (they have been changed to online systems) to decrease the possibility of corruption.
Economic Factors
Indonesia is one of the largest economies in the world. Currently, it is the sixteenth largest economy globally. The country’s Nominal GDP was estimated to be approximately 1.03 trillion dollars in 2018. For the same year, the GDP per capita was approximately was 3871 dollars. That was 14 dollars-decrease from that of 2017 (Country Economy… 2019, 6). Even though the country’s economy was heavily hit by the Asian Financial crisis in ’97, it has been vastly growing in the last twenty years. The rise in the country’s economy gives investors the opportunity to establish businesses in a particular nation. Economic growth in a country means that there is room for the establishment of innovative and inventive businesses to ensure the flow of finances in the country (Wheeler, Hammer, Kraft, Dasgupta, & Blankespoor, 2013, 87). The potential investors will be welcomed warmheartedly because the government wants to ensure maximum economic growth. The economy of Indonesia is mainly dominated by foreign investors and private companies. The government, however, is one of the largest business owners in the land. The largest industries in Indonesia are oil and gas, hospitality, agriculture, hydrocarbons, mining, and automotive. Indonesia imports different commodities from neighboring countries such as Malaysia, China, India, Japan, the USA, and Singapore.
Besides, the Indonesian corporate tax rate is relatively favorable to businesses. In Indonesia, the corporate tax rate is twenty-five percent (Trading Economy… 2019, 10). The individual tax rate is examined in relation to the living standards of the person. The country residents an income tax ranging from 5% to 30% depending on their monthly income. Non-residents pay a constant rate of 20% tax on their total income. Currently, the unemployment rate is relatively low. It was estimated to be at 5.78% (Country Economy… 2019, 10). the high rate of unemployment will provide the upcoming industry with much-needed cheap labor. The organization will not have to worry much about the labor because there are many people in the country in need of a job. The economic stability of Indonesia provides a more significant opportunity for international business. The fixed tax rates will enable the businesses to plan their revenues adequately.
Social Factors
Indonesia is one of the countries with the largest population in the world. In 2019 its population was estimated to be approximately 280,000,000, which represents 3.51 percent of the overall world population. The majority of Indonesians are Muslims, with only ten percent Christians (World Meters, 2019, 55). The country’s Constitution offers the citizens the right to choose the religion they prefer. The type of religion in a nation determines the products to be sold in that country. For instance, some religions do not use particular food, therefore, starting up a business involving that food, then the owner is entitled to a loss because there will be no enough customers. Moreover, the country is ethnically diverse. It has different races residing in its towns. Indonesian is the primary language in the country, even though it has more than three hundred local languages. Investors must spend quality time learning the languages in the country to ensure the success of their businesses. Learning a foreign language may be a challenge to a company since it involves spending many resources such as finances and time, which can be used in the development of the business.
Moreover, the health and literacy of the citizens are assured in the country. Currently, the rate of literacy in Indonesia was estimated to be 95% (BBC, 2018, 7). The government of Indonesia heavily pend on the health care systems and education. A high level of education ensures the availability of experienced and skilled labor to work in the companies. The average class is tremendously growing in the country, increasing the speed of change in consumer behavior. There is a continuously rising demand for Western tech products and food (such as frozen and processed food, ready meals, healthy food, and Western fashion). Nevertheless, Indonesia experiences certain massive social changes such as corruption, poverty, malnutrition, human rights violation, and a high rate of smoking which may reduce the life expectancy of individuals.
Technological factors
Indonesia has made impressive progress in technology adoption. The progress can be attributed to the high literacy rate in the land. The government disclosed a plan of increasing technology use to enhance growth and increase capacities of the industries in the coming years (Oxford Business Group, 2019, 18). The country uses the new technology platforms such as Television to get both local and international trending news. Other social media platforms like Instagram, YouTube, Twitter, Facebook, and WhatsApp are also doing well in Indonesia. The high adoption of technology in the country eases marketing practices.
Legal Factors
In Indonesia, the law protects employment rights. Organizations need to offer special notice to matters concerning over-time payment, leaves, religious holiday allowances, social security, and working hours. Therefore, starting up a business In Indonesia by a foreign investor is a time-consuming and complex process due to all the legal procedures one is required to follow. Besides, trade unions are active and legal in the country, even though they represent a small fraction of the overall workforce (Cavusgil, Knight, Riesenberger, Rammal, & Rose, 2014, 20). The Constitution permits peaceful demonstrations and strikes when the workers are not satisfied with a specific condition in the company. For instance, many employees always carry out strikes due to poor working conditions and payment.
Environmental Factors
Indonesia is situated across a chain of several islands between Australia and Asia. It is a great country with so much to offer to international and local tourists. The country always faces environmental challenges due to its location. The main environmental challenge the country experiences is the tsunami. The tsunami may arise from the shores of the Indian ocean put at-risk businesses and people’s lives. The tsunami may lead to mass destruction of property and lives. For instance, a tsunami that occurred in 2004 vastly destroying farmlands, buildings, and roads, killing several people in the process (BBC, 2018, 7). Other environmental challenges experienced by Indonesia include rapid urbanization, over-exploitation of marine resources, environmental pollution, and deforestation.
Sources of Finance Available to Coca-Cola Company in an International Capital Market
An international firm such as Coca-Cola can obtain funds from different sources. Each financial source in the international market has a distinguishing feature, which should be well learned to identify the best available sources of raising finances. There is no single financial source that can be considered best for all organizations; however, they can decide and make a choice on which source to go for depending on the cost, situation, associated risks, and purpose (Deers, 2020, 5). For instance, when a business wants to raise capital to meet a fixed asset requirement, the firm may go for long-term funds, which may be raised in the form of borrowed or owned funds. Likewise, when the goal is meeting the daily requirements of the company, the short-term source may be essential. Some of the various financial sources available for international businesses include retained earnings (Ameer, 2010, 120). The fraction of the total earning is retained by the firm for future use. It does not share out all its revenues to the stakeholders as dividends (Cravino & Levchenko, 2017, 923). Coca-Cola company does not always spend its revenues, it always makes sure that some are retained for future use or in case of emergency.
Besides, another source of finances from the international market is the trade credit. This is a continuous and convenient fund source. Here the company will obtain its finance from the credit extended by one seller to another for buying goods and services. Trade credit encourages the purchase of products without immediate payment (Cravino & Levchenko, 2017, 923). Companies always use this financial source to meet the short-term goals of the organization. The source is always available to consumers with goodwill and sound financial standing. Besides, leasing financing is another source of funds in an international market. A lease is a predetermined agreement in which one organization gives the other the right to use their asset as they give a periodic payment in return. The Coca-Cola Company may rent its assets to another company for a specific period of time to obtain finances.
Furthermore, a firm can also raise funds through public deposits. These are deposits an organization raises directly from the public. Nonetheless, the interest rates of public deposits are always higher than that of a bank deposit. The organizations give an opportunity to any individual interested in depositing money in their firm (Madura, 2010, 4). The depositors are given a prescribed form to fill, and the company, in return, provides a deposit receipt as acceptance of the debt. The company can use public deposits to take care of both the short-term and medium financial needs of the firm. Public deposits are valuable to both the organization and the depositor. While the cost of the deposit is slightly lower than the borrowing cost from banks, the depositors are always subjected to higher rates of interest.
Potential Risks and Uncertainties Facing Companies Operating in an International Environment
When a company decides to participate in an international financial activity, the firm takes on extra challenges along with the opportunities. The challenges make it hard for the organization to uphold reliable and constant revenue. Some of the risks and uncertainties include political and foreign exchange risks.
Foreign Exchange Risks
Foreign exchange challenges may arise when the investment value fluctuates due to alteration currency’s exchange rate. When a domestic currency rises against a foreign currency, there will be a decrease in the profit earned in the foreign nation (Zhao, 2010, 105). Foreign exchange risks can damage a company’s revenues and sales. For instance, when the Coca-Cola company is based in the US, and many of its products are sold in Japan, then depreciation of the Japanese Yen against the US dollar will result in loss. Any Japanese Yen-dominated revenues received by the company will produce fewer US dollars when compared to before the depreciation of Yen. Foreign Exchange risk mainly affects businesses that import and export their supplies, products, and services.
Political Risks
Political risks occur when the government of a nation changes its policies unexpectedly, negatively affecting the foreign company. The policy changes may include trade barriers that may prevent or limit international trade (Clark, 2018, 191). Some governments will demand extra funds and bonuses to give the right t export products into their nation (Langford, Behn, & Lie, 2017, 310). Quotas and tariffs are mainly used by the governments to offer security to domestic producers by protecting them from international competitors. Demanding for tariffs and additional funds by governments may have a vast impact on the revenues of an organization because it will cut profits due to high taxes on export.
Finally, organizations may incur risks due to a lack of needed skilled personnel to carry out the production practices. Some developing countries are still not modernized, and the rate of the adoption of the new technology is low (Verbeke, 2013, 29). The company will have a challenge of acquiring labor when it comes to these countries with modern machinery. There will be few people who understand how to operate the machines. The company will have to train its employees n how to manage the machines for proper production.
Language Barrier
The language barrier is another challenge faced by businesses operating in an international environment. For instance, in Indonesia, the primary language is Indonesian. Therefore, any foreign investor must hire a translator to ensure smooth communication with the locals and employees (Verbeke, 2013, 25). Sometimes, the investors will go to a greater extent of learning the local languages of the country. Both hiring of translator and learning the local languages are costly, adding more expense to the company.
Tools and Solutions to Minimize Risks and Uncertainties
Political Risk Insurance
Political risks can be reduced by acquiring insurance to the challenges. Similarly, organizations may acquire political risk insurance to protect their loans and equity investments from a particular action of the government. International corporations will always structure their annual filings with the United States Securities and Exchange Commission (Langford, Behn, & Lie, 2017, 315). Companies always take that action to lessen the political risks they incur in foreign nations (Holburn & Zelner, 2010, 1290). Political insurance will help international organizations to continue to grow and develop their business even in uncertain or unpredictable business conditions. Organizations can buy insurances that provide protections in the event of terrorism, war, labor disputes, and trade restrictions.
Conclusion
In a nutshell, international investment has been stimulated by globalization. It has been eased due to enhancement in transport, technology, and communication. Globalization has facilitated the movement of people from one nation to another, which has given them, a chance to venture into different areas. Even though international investment offers an investment opportunity to investors, it has some risks and uncertainties. Some of the significant risks include political risks foreign exchange risks. The risks can be minimized by acquiring political risk insurance.
References
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